New technologies are a fundamental part of modern economic life. Economists and engineers, no less than politicians and public opinion, are devoting increasing attention to understanding why, how and where technological innovations are generated. This book is devoted to discussing two separate, but closely connected bodies of literature on the sources and nature of new technologies. The first set is focused on the similarities and differences in the organisation of innovative activities at the national level, whilst the second group is centred on the role of globalisation in shaping technological change.

The first body of literature stresses that a proper understanding of technological developments, and their dissemination throughout the economy and society, requires us to also understand the social fabric that shapes these developments. Over the last decade, the notion of systems of innovation, either local, regional, sectoral or national, has been widely used to map and explain the interactions between agents that generate and use technology.

The second body of literature has studied how innovation interacts with economic and social globalisation. The debate on globalisation has flourished over the last decade and a large number of themes connected to it have been investigated. Trade, production, finance, culture, media and many other fields have been scrutinised from the viewpoint of globalisation. The issue of technological change has been at the core of these debates on globalisation, and rightly so. On the one hand, technology is a vehicle for the diffusion of information and knowledge across borders; on the other hand, technological developments have themselves been stimulated by the globalisation of markets.

Introduction

Globalisation is widely equated with institutional convergence (Kluth and Andersen, 1996, 1997). Finance is quoted as the first and foremost example of how key economic institutions are conforming to common modes of operation and design across the OECD. This chapter will advance the opposite perspective. Taking various national schemes aimed at promoting the allocation of capital to innovative SMEs as the point of departure, we intend to demonstrate that financial institutions are indeed subject to national trajectories of development even when attempting to cater for new market and/or policy demands.

Europe's lack of ability to create new jobs during the economic upturns of the mid1980s and 1990s has largely been attributed to an inflexible industry structure featuring paramount shortage of new market entrants particularly in the high-technology segment. European financial institutions have been pointed out as a key source of industry structure rigidity. In response a venture capital system, modelled along American lines, has been suggested as the optimal way to ensure capital and managerial skills for European high-technology entrepreneurs and SMEs. Consequently a number of European-level initiatives has been launched, such as ‘Euroventures’ in the 1980s and ‘EASDAQ’ in the 1990s, to bring about a functioning venture capital market.

While the venture capital approach has been dominant in political and academic debate, national approaches to eliminate the lack of capital and managerial skills for high-technology entrepreneurs and SMEs have been extremely diverse and display a stronger allegiance to existing institutional set-ups than to the original model operating in the US.

Introduction

The process of globalisation – whether just of technology or of the economy more generally – has profound implications for the conduct of economic policy. Yet there is still little clarity over what the term ‘globalisation’ signifies; over the extent to which the process it denotes has developed; or over the implications of any of this for government economic policy.

The powerless state perspective characterises the world economy as a truly global system which has undermined the ability of national governments to implement effective independent policies (Ohmae, 1990, 1993, 1995).

This view has been challenged, for example, by Hirst and Thompson (1996). However, most such critiques accept the basic premises that, firstly, there has been some increase in globalisation – it is only the extent of the increase which is questioned; and, secondly, that to the extent that the degree of globalisation has increased, the scope for government action is thereby diminished – again, it is only the degree to which government policy has become less effective which is disputed.

Introduction

Globalisation is not a single phenomenon, but a catch-all concept to describe a wide range of forces. The importance of globalisation is currently the focus of a vivid controversy. On the one hand, there are those who maintain that globalisation has effectively contaminated the greater part of economic life (Ohmae, 1990; Chesnais, 1994; Barnet and Cavanagh, 1994; Brecher and Costello, 1994; Perraton et al., 1997); on the other, there are those who take a more sceptical view (Ruigrok and van Tulder, 1995; Michie and Grieve Smith, 1995; Hirst and Thompson, 1996). However, the terms of the debate are often unclear as three issues, which although related should be kept separate, are not well clarified.

The first is to establish the importance of global forces in social life (does globalisation exist or not?). This requires the identification of the different types of globalisation and an estimate of their weight according to geographical location, industrial sectors and social groupings. The second refers to the value judgement attributable to globalisation (is a global society a good or a bad thing?). Answers to this type of question can only be given by clarifying the actors of reference. Finally, the third issue refers to the viability of national policies enabling the modification of the inertial tendencies produced by globalisation (are there any policies which can regulate globalisation?). As these policies are mainly implemented at a national level, the debate on globalisation must necessarily be judged with reference to the effectiveness of the policies implemented by national governments.

In this chapter,we attempt to critically assess the concept of globalisation as applied to innovation. Our intention is to define its implications for national policies.

Introduction

I will divide my discussion into three sections. First, I will explain why innovation matters to the growth and competitiveness of firms and wider economies, and to the trade balances of national economies. I argue that with globalisation, innovation is exercising a steadily increasing influence upon economic performance. I advance this argument in the context of two very different perspectives on profits and economic growth, each of which can be found in the extensive historical literature on these issues.

Second, I deal with a possible counter-argument, which says that in a global world the rewards from innovation cannot be kept by the originators within national boundaries, and therefore it becomes less important as a source of profits and growth. This is known in the literature as the ‘appropriability’ argument – the view that it is difficult for innovating firms or countries to appropriate a full return on their investments in innovation. I show instead how, in the light of a newly emerging consensus among economists about the nature of technological change (a consensus especially, although not exclusively, among non-neoclassical economists), the appropriability argument has been overplayed, and need not be of undue concern.

Third, I contend that national systems of innovation and states continue to have an important role to play in a global economy. Far from collapsing with globalisation (as some writers have imagined), national systems of innovation have been consolidated, and I explain why. There is also a role for policy support for innovation by national states, despite the fact that the justification for that policy cannot rest entirely on the appropriability argument, as it has done traditionally in the economics literature since about 1960.

This is a brilliant set of papers. Unlike many such collections by diverse authors, the standard is uniformly high and even more surprisingly, there is a clear common theme which links them together despite the lack of common authorship. That theme is the elucidation of just what is meant by ‘globalisation’. As Archibugi and Iammarino observe, this is a catch-all concept which is used indiscriminately to describe many diverse phenomena.

In particular, the book concentrates on the ways in which globalisation affects and is affected by technical change and systems of innovation. Over the last decade or somany authors have used the expression ‘national system of innovation’ to describe and analyse those networks of institutions and activities, which in any country, initiate, modify, import and diffuse new technologies. Some of the authors have attributed the origin of this concept to me. This is not accurate. To the best of my knowledge the expression was coined by Lundvall, who contributes the first chapter in this book in which he argues cogently that what matters most is learning, rather than knowledge itself. In any case, as I am sure he would agree, and as several of the chapters point out (e.g. Dosi and Kluth and Andersen) there is a long tradition in economic thought of this combined approach to technical innovation and institutional change, going back at least to Count Serra in Naples.

As this discussion has unfolded, it has become apparent that both the international (‘global’) and the sub-national (‘regional’) dimensions of innovative activities merit investigation and debate as well as the national dimension.

Introduction

We shall show that the activities generating the skills and know-how that give firms competitive advantage are less internationalised than all other dimensions of corporate activity. Even very large corporations in most cases perform most of their R&D at home. As a consequence, companies' innovative activities are significantly influenced by their home country's national system of innovation: the quality of basic research, workforce skills, systems of corporate governance, the degree of competitive rivalry, and local inducement mechanisms, such as abundant raw materials, the price of labour and energy, and persistent patterns of private investment or public procurement.

We do not foresee any fundamental changes in future. The efficiency gains from the geographical concentration of innovative activities will remain, even if firms increasingly seek out unique skills in foreign countries. The State will continue to provide infrastructure, incentives and institutions that strongly influence the rate and direction of innovative activities in locally based corporations. There are no mechanisms to ensure that national systems of innovation converge in either their characteristics or their performance. Nor are there any signs of the emergence of a European system of innovation: the dominant system is likely to remain the German one.

Other authors have come to similar conclusions, most notably Porter (1990), based mainly on in-depth case studies, and Hu (1992) based on an analysis of the nature and the behaviour of multinational firms. Our research is based on systematic information on the world's largest firms that were technologically active in patenting in the USA in the 1980s. It consists of 587 firms, of which 249 were US owned, 17 from Canada, 143 from Japan and 178 from Europe (Patel and Pavitt, 1991).

Introduction

National environments differ in their capability of stimulating, facilitating or preventing innovative activities of firms, and historically national economies and their institutional set-up have had a considerable influence on the firms' competitive success. A vast recent literature by formulating the concept of the ‘national system of innovation’ has confirmed that the structural characteristics of a national economy, such as its specific production structure, its technical infrastructure and other institutional factors, can strongly influence firms' innovative performances (Freeman and Soete, 1997; Lundvall ed., 1992; Nelson ed., 1993; Edquist ed., 1997). It has been shown that differences in national systems are particularly important between the United States, Japan and the EU, and between the European countries themselves.

The concept of national specificities determining national performance, however, has been recently challenged on the grounds that the current wave of globalisation and sophistication of financial markets are aligning national economies. The growing role of transnational corporations (TNCs) in the current global competitive phase, as many point out, is changing the face of the world economy in the direction of standardisation and convergence of national structures and performances. A few even predict that the nation state will soon be obsolete and that national diversities, that were very important in the past, are likely to disappear in the near future. The limiting case would be of a fully transnational economy without any residual disparities across countries (Ohmae, 1990).

This chapter assesses the issue of the linkage between globalisation and national specificities by looking at the dynamics of world trade and trade specialisation of major economies. It is divided into four sections.

All the chapters in this book were commissioned specifically for this volume and draft versions were discussed at a working conference in April 1996 in Rome. This conference marked the second in a series of Euroconferences entitled ‘The Globalization of Technology: Lessons for the Public and Business Sectors’ co-funded by DGXII of the European Commission as part of the Human Capital Mobility (HCM) Programme (Grant no. ERBCHECCT940230), organised by the three of us.

The overall Euroconference initiative has a number of objectives, but a key aim is to help inform, involve and support young scientists and researchers in the field of industrial innovation and technology policy. The Rome conference therefore sought to bring together an informal group of some young and some not so young researchers working in this field. The result was a lively and interesting debate surrounding the issues of national innovation systems and of the globalisation of technology which is of such crucial strategic importance to both private and public sectors alike.

Obviously a vital role was played by all the conference presenters, many of whom have subsequently become contributors to this book. We would therefore like to thank Jørn Andersen, Giovanni Dosi, Paolo Guerrieri, Simona Iammarino, Michael Kitson, Michael Kluth, Bengt-Åke Lundvall, Keith Pavitt and Mario Pianta for presenting papers and participating in the discussions. We would also like to thank John Cantwell, John Dunning, Pari Patel and Clifford Wymbs for their contributions.

We are grateful to the Institute for Studies on Scientific Research and Documentation of the Italian National Research Council for hosting the Conference in Rome.

The changing nature of foreign direct investment

Until about a decade ago, the received theory of foreign direct investment (FDI) asserted that firms established foreign value-added activities in order to exploit their home-based competitive (or ownership-specific (O)) advantages, and to benefit from the internalisation of cross-border intermediate product markets. To be sure, there was some natural resource seeking foreign direct investment (FDI), designed to gain access to agricultural products, raw materials and minerals not available, or not available on such advantageous terms, in the investing country. Multinational enterprises (MNEs) also invested in developing countries to take advantage of low cost and/or more productive unskilled or semi-skilled labour. However, in each of these cases, as with market and efficiency seeking FDI, the main objective of the investing firms was to seek out the location specific assets of foreign countries, which could be used in conjunction with their own mobile O specific assets, which, in turn, were assumed to reflect the availability and quality of created assets in their home countries.

World economic events of the last decade – particularly the globalisation and liberalisation of markets, a new generation of technological and organisational advances and the emergence of third world countries as significant sources of FDI – have changed the economic environment for MNE activity. While, as with exports and licensing arrangements, international production continues to be a means of capturing economic rent on the O advantages of the investing companies, increasingly firms are investing abroad to protect or augment their core competencies.

Introduction

In these short notes it is certainly impossible to provide any fair assessment of the wealth of research which has gone over the last decade into the analysis of national systems of innovation (and, relatedly, national systems of production). Hence, in the following, I will limit myself to some rather telegraphic remarks and propositions concerning, first, the empirical background of such studies; second, the relations among (partly different) interpretative perspectives on the subject; and, third, their implications also for other domains of economic analysis – including the theory of the firm and growth theory. Finally, I shall briefly hint at some policy implications, especially with reference to the European case. In doing all that I will raise more questions than provide answers: however, a few of the propositions that follow are empirically testable, and thus may provide some inspiration for further research in the area.

Persistent asymmetries across firms and countries

The general historical background of the discussion of ‘national systems’, as I see it, is the observation of non-random distributions across countries of:

1. corporate capabilities;

2. organisational forms;

3. strategies; and ultimately

4. revealed performances, in terms of production efficiency and inputs productivities, rates of innovation (however measured), rates of adoption/diffusion of innovation themselves, dynamics of market shares on the world markets, growth of income and employment.

Note that the patterns defined by the latter indicators, when measured at the level of sectors and countries, tend to display relatively high degrees of persistence over time, despite a somewhat higher inter-company variability.

Introduction

This chapter explores the possible existence and form of regional systems of innovation (RSI). Christopher Freeman has defined a national system of innovation (NSI) as the network of institutions in the public and private sectors whose activities and interactions initiate, import, modify and diffuse new technologies (Freeman, 1987, p. 1). Although this definition was applied at a national level it can arguably be equally applied at a regional or local level. This chapter will seek to explore these issues, not suggesting that regional systems of innovation should be seen in some way as supplanting national systems of innovation, but rather should be viewed as providing another layer or conceptual lens to the whole system of innovation. In so doing, it seeks to develop in a geographical sense at least part of Metcalfe's (1995, p. 41) view that the national unit may be too broad a category to allow a clear understanding of the complete dynamics of a technological system and instead focus should be on ‘a number of distinct technology-based systems each of which is geographically and institutionally localised within the nation but with links into the supporting national and international system’.

More specifically, therefore, this analysis will examine whether the broad definition of national systems of innovation can also be applied at a regional level. Do, or can, regions offer distinct systems of innovation that are worthy of study? If they do exist, in what ways are they different from national systems of innovation? If the concept is relevant, is it becoming more or less applicable over time? What more general lessons can be learnt from the study of regional systems of innovation?

The introductory discussion provides an example to illustrate the possibility of coordination failure due to the presence of multiple Pareto-ranked Nash equilibria. Of course, as remarked earlier, whether coordination failures actually occur depends on the selection of an outcome from the set of Nash equilibria. If, for instance, the Pareto-dominant Nash equilibrium is a natural focal point, as suggested, for example, by Harsanyi–Selten [1988], then understanding the macroeconomic implications of coordination failures would be somewhat less interesting.

This chapter first reviews some recent experimental evidence that bears directly on equilibrium selection in coordination games. The evidence both concerns results on equilibrium selection and provides some insights into the process of equilibration. The second part of this chapter describes a variety of selection theories that bear directly on coordination games.

One conclusion of the experimental evidence is that coordination problems are not a pure theoretical curiosity. In particular, coordination failures are routinely observed in experimental games.

EXPERIMENTAL EVIDENCE

The discussion of experimental evidence is partitioned into three parts. First, evidence from simple coordination games is presented. Given the frequency of coordination failures observed in these experiments, further treatments which explore possible remedies to coordination problems, such as preplay communication, are presented.

Baseline Experiments

As a starting point, consider the coordination game in Figure 1.1. This game was the focus of a study of experimental coordination games by Cooper, DeJong, Forsythe and Ross [1992]. In this game, there are two pure strategy Nash equilibria, {1, 1} and {2,2}, and a mixed strategy equilibrium.